Article

Cloud Computing Is in the Air

by Joshua Greenbaum

October 1, 2008

On-demand computing is getting lots of attention right now, but the true future of the entire on-demand and software-as-a-service concept may actually be “cloud computing.” Where is SAP’s place in the on-demand market?

The delays announced last spring for the SAP Business ByDesign solution — SAP’s mid-market, on-demand offering — clouded more than a few crystal balls, particularly those trying to judge SAP’s commitment and timeliness with regard to the on-demand market. The solution’s delay has engendered skepticism about whether SAP was ever going to make a move toward on-demand that would stick, and stick hard.

It reminds me of the imbroglio surrounding SAP’s entry into the Internet market back at the close of the last century. Headlines claiming that SAP was late to the Web challenged SAP’s credibility and annoyed the heck out of one senior SAP executive in particular. More than a few prognosticators wondered if SAP would ever make it to the Web and what its future could possibly be like, absent this essential capability.

Getting the point? SAP is rarely first to market when it comes to the latest and greatest, particularly when the hype factor is high and the business case is questionable. And yes, SAP was late to the Web, which turned out to be a smarter strategy than being first: The recovery costs from being first to the Web when the dotcom bubble burst devastated many Internet pioneers. Even stalwarts like Cisco, Sun, and Oracle took a major hit trying to pull themselves out of the ensuing maelstrom.

Cutting Through the On-Demand Hype

So SAP is looking late to the on-demand party, which, judging by its timing in reaching the Web, almost begs the question of whether SAP is actually setting the pace for the market by being late. In other words, is on-demand really ready for prime-time, as in a full-court press by the likes of SAP? Or is it still early enough that big players like SAP need to be cautious so as not to disrupt their business or their customers’ businesses?

For vendors like SAP, there are two problems with on-demand. The first issue is that there’s really only one truly successful company in the market, Salesforce.com, that SAP can look to and wonder if entering the market full bore is worth the effort. But behind Salesforce.com’s revenue and customer success is a sales and marketing cost structure that is so top-heavy that one of their competitors claims that Salesforce.com is more of a travel and entertainment company — providing entertainment and travel services to its large direct sales force — than an enterprise software-as-a-service (SaaS) company. The problem? Salesforce.com’s SEC filings show the company spends almost a dollar in sales and marketing to make a dollar in revenue, and SAP, not to mention competitors like Microsoft, has no interest in those kinds of margins.

The second problem, of course, is that SAP’s direct sales, high-ticket business model doesn’t mesh well with a mass-market on-demand opportunity. Indeed, one of the problems with SAP Business ByDesign is finding the right channel partner who can sell it on SAP’s behalf: SAP can’t have a bunch of elephant-hunting salespeople trying to make the much lower margins that on-demand, mid-market products can command. Right now, it’s not obvious how to find this kind of partner in the quantity that SAP needs.

Crystal Balls and Market Realities

Even before the announcement that SAP Business ByDesign was going to be delayed, I asked SAP co-CEO Henning Kagermann about SAP’s plans regarding the latest derivation of the basic on-demand concept — cloud computing. This cloud is meant to represent a limitless supply of computing, available as a utility, that can be tapped by companies to provide on-demand IT functionality without the burden of owning, updating, and otherwise managing the requisite infrastructure.

The basic difference between cloud computing and on-demand/SaaS revolves around vendor- versus user-centric business models. On-demand/SaaS are a set of specific services and applications — like Salesforce.com or payroll processing — that are offered in an outsourced, subscription-based business model by a specific vendor. Cloud computing, on the other hand, is less proscriptive: The cloud is where a customer runs on-demand or SaaS functionality, whether it’s vendor-provided, customer-developed, or a combination of the two.

As such, cloud computing is really a superset of on-demand and represents the true future of the entire on-demand/SaaS concept, for the following important reason: Most proponents of cloud computing — and this includes major platform players like Microsoft, IBM, Amazon, and others — are largely agnostic about what percent of any given function runs in the cloud versus on-premise. To date, thankfully, there’s no orthodoxy about this essential question, which means, rightly, that most of these companies are on the side of letting the customers decide which ultimate deployment model is best for their particular needs. On the other hand, most proponents of on-demand/SaaS, such as Salesforce.com, Workday, and others, believe that the only good service is an on-demand service, regardless of the real-world interest in more of a mix-and-match approach to the on-premise versus on-demand question.

With these issues as the background to my question, Henning Kagermann’s response seemed almost poetic. “Cloud computing is in the air,” he replied with a nice unintended pun. He then went on to elaborate that SAP believes, with good reason, that cloud computing will be a major force in the industry. SAP plans to be supportive of industry efforts to build large clouds of computing power and to let SAP’s users tap into that computing power as they see fit.

But Kagermann also made it clear that SAP saw no reason to build its own cloud, saying that the company would concentrate more on providing the applications to turn the cloud from a collection of cheap computing cycles into something that actually provides business functionality to a user.

This said, it’s clear that SAP’s thinking — and actions — regarding on-demand, software-as-a-service, and cloud computing are in line with both the reality of the market and SAP’s historical approach to new opportunities.

Taking a Pragmatic Approach

When it comes to SAP Business ByDesign, SAP is showing a certain pragmatism that actually aligns with market reality — even if the delays in Business ByDesign are caused by unintended problems, not deliberate strategy. And when it comes to cloud computing, Kagermann is also on the mark: Cloud computing needs to come down to earth before it’s time to make a major market push, and SAP is willing to bide its time, let someone else take the first-mover risks, and then strike when the opportunity and capability is well-understood.

So SAP is late to on-demand and plans to be late to cloud computing, too. Five years from now, we’ll be able to look back and evaluate the results of this pragmatic approach. If being late today is anything like being late in 1999, SAP’s strategy, inadvertent or otherwise, looks like the right way to go.

Joshua Greenbaum is a market research analyst and consultant specializing in the intersection of enterprise applications and e-business. Greenbaum has more than 15 years of experience in the industry as a computer programmer, systems analyst, author, and consultant. Before starting his own firm, Enterprise Applications Consulting (www.eaconsult.com), he was the founding director of the Packaged Software Strategies Service for Hurwitz Group. You can reach him at editor@netweavermagazine.com.

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